We’ve just published the latest ISG Index, which includes – for the first time – a view on the growing As-a-Service market. Whilst combined second-quarter ACV in the Europe, Middle East and Africa (EMEA) market fell by 18% year-on-year to €2.2 billion, the new data reveals record growth of the As-A-Service segment, contrasting the sluggish activity in traditional sourcing.

On one side, traditional sourcing fell 28% to €1.6 billion, its lowest ACV in seven years. This is largely owing to a lack of large awards and a noticeable pullback in contract restructurings. However, the As-a-Service market, at €600 million, was up 38% for the same period.

Over the first six months of the year, the EMEA market generated €4.9 billion in combined ACV (which includes both traditional and As-a-Service activity), flat with the prior year. Although traditional outsourcing values declined during this period, As-a-Service ACV grew 38%, reaching its highest point ever and passing the €1 billion mark for the first time. This growth was fuelled by an impressive lift in Infrastructure-as-a-Service (IaaS) activity, which rose 63%. Software as a Service (SaaS) logged a respectable 9% growth in the same period.

Globally, these As-a-Service activities now represent 36% of the combined market, having nearly doubled their share since early 2014. ISG predicts that this segment will continue to see accelerated growth in the months and years ahead, both globally and in EMEA, as clients leverage increased automation and continue to shift operations to the cloud. The global combined market saw ACV of €6.4 billion awarded in the second quarter, down 2% from the prior year. At the half year, global ACV of €13.4 billion was up 10% compared with the first half of 2015, with record high As-a-Service values somewhat offsetting the sluggish performance in the traditional outsourcing market.

Market insights

By market, the Nordics led the way. In the first half, its traditional outsourcing ACV was up 25% over the second half of 2015, and more than doubled compared with the first half of 2015. France followed their lead, with values up 14% sequentially and up by one-third year on year as a result of some large contract awards. However, performance in the other sub-regions was lacklustre.

In the UK, EMEA’s largest market, the figures revealed a surge in the value of traditional outsourcing of almost 40% compared with the admittedly soft previous half-year period. Compared to the first half of 2015, ACV fell 11% as the result of a pullback in contracting activity.

Despite healthy contracting activity, which rose by a third for the half year, DACH’s traditional market ACV plummeted by 71% sequentially and 30% year on year as large companies in the region adopted a characteristically cautious approach to some of the newer transformational services in the market.

Sector breakdown

By industry, Financial Services remained the leading sector for both value and contracting activity. Its €1 billion ACV represented a decline of 17% compared to the first half of 2015, despite its number of contracts increasing by 17% for the same period.

Manufacturing had its strongest 12-month performance since 2011 and while slightly down on the prior period’s impressive performance, the first half picture was positive, up 34% on the previous year. Other industries fell short at the half year; with the exception of Retail, which was up slightly on a small base.

Looking ahead

EMEA’s traditional sourcing markets pulled back in the second quarter and came in at lower levels than projected, due to a lack of large deals and restructurings, and alongside some challenging macro-economic factors within the European Union. These factors, and notably the result of the UK referendum on EU membership, will continue to have an impact, although it is too soon to tell exactly what this will look like. We expect traditional market ACV for the year may come in slightly lower than 2015. At the same time, As-a-Service growth should continue along on a steep, upward trajectory as corporations in EMEA increasingly harness the flexibility and speed on offer.

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